Development economists Jayati Ghosh and Charles Abugre are back to explore the role of the global multilateral organisations in exacerbating the debt crisis. They take a forensic look at policies and mechanisms, including the flawed G20-led Common Framework and the IMF debt sustainability analysis. And they offer up pragmatic solutions that will help break the endless cycle of debt.

And we hear from a chicken farmer about running her small business in the economic turmoil of debt-distressed Zambia.

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Hi there!

Welcome to Economics from the South.

Where we rethink economics, give a voice to marginalized communities, and come up with lasting solutions to

ensure a fairer, more sustainable future for all of us.

I'm your host, Julians Amboko.

a Kenyan business journalist.

It's great to have you on board this series from the International Development Economics Associates, where I

talk with world renowned economists and development thinkers about the ongoing global debt crisis and what reforms

are needed to improve the global financial architecture.

And we also hear the stories of ordinary people caught up in one of the biggest economic challenges facing the world.

Well, I'm delighted to be back with Jayati Ghosh from India and Charles Abugre from Ghana, two development

economists who are at the forefront of the ideas network.

Jayati is a founding member of its executive committee and Charles is the current executive director.

Episode four.

Last episode on Sri Lanka, we heard very starkly the consequences on people's lives of the failure of governments

and the Bretton Woods institutions to find a lasting and equitable solution to the external debt crisis.

This time we're drilling further down into the role of the global multilateral organizations in the debt crisis.

Let's start with a measure launched in November 2020 after the finances of developing countries

were upended by the COVID 19 pandemic.

As more and more countries became chronically debt distressed, the G20 led Common Framework was supposed to speed up and

simplify the process of getting overstretched countries back on their feet by bringing private creditors to the

table at the same time as bilaterals and multilaterals.

So, is the Common Framework making any difference?

Charles Abugre kicks off our conversation.

Countries are very reluctant to apply for them and the few that have applied have witnessed that it doesn't work.

The first one is that the idea of common treatment doesn't really work.

The IMF doesn't, which is supposed to be facilitating this process.

It's unable to bring the diverse creditors together and to get an agreement between bilaterals, multilaterals and private

capital markets, the bond markets and China, for example.

So, uh, Zambia's attempt to To address this has fallen through the cracks and um, Ghana is the same still struggling

because the private creditors refuse to take a haircut or they, they do everything in working as cartels to reduce

the, the, the, any possibility of, of any higher cuts.

And so increasingly haircuts are now being.

Pushed on, on, on developing countries.

We have seen some new forms of conditionality, which is started with Ghana, which is a domestic debt restructuring.

So Ghana and, uh, and Sri Lanka, which followed it, are forced to restructure their domestic debt, simply

to be able to create the fiscal space to pay their, their external credit, largely private capital market.

So the common framework has not helped the multilateral banks who could play a role in helping to ease the

flow of capital to these countries to make it possible.

For them to grow as they restructure their deaths are not playing a role in the common framework.

So it isn't functioning, but at the same time, it still gives the IMF, uh, the room to, to push more and more austerity.

Thank you for that, Charles.

So let me now come to Jayati.

One big failure of the Common Framework is that it still relies on this IMF DSA, the Debt

Sustainability Analysis, as if it is this wonderful thing which is written in stone and which is this objective truth.

It's not.

And one of the reasons why China, for example, has been objecting to participating in it on terms dictated by

the G7 and by the Western countries is because they say, we don't believe this debt sustainability analysis.

And I think they're completely right on that.

So the IMF.

conducts a death sustainability analysis.

And because they're presented as these technical people who have no other interest and so on,

everybody says, Oh, yes, that's the gold standard.

They know what they're doing.

And we just accept their numbers.

This is ridiculous, because first of all, it's opaque.

They don't give you the full details of how they're doing things.

Secondly, it's based on a completely faulty model of the economy in which they don't recognize

even the impact of their own policy proposals.

So for example, they recommend fiscal discipline or austerity, cutting down on public spending.

And they assume that that will have no impact on the GDP, on economic activity.

They recommend big increases in certain prices or in interest rates, and they don't recognize

that that will destroy small enterprises.

They assume a rate of growth of GDP that is going to keep happening despite all of these things.

And there are many other problems with the debt sustainability analysis, including what Charles has just mentioned.

In some countries like Sri Lanka and Ghana, they are now putting the domestic debt and the foreign debt together.

They're clubbing them together, which is completely ridiculous because foreign debt has to be repaid in foreign exchange, in

dollars and so on, whereas domestic debt you can repay anyway.

You can repay by printing money.

You can repay with many other means.

And the idea that you can.

Just club them together and say that there has to be an aggregate reduction reduces the amount of

debt reduction that foreign creditors have to take.

So that's really the reason behind doing that.

Even more, these very optimistic projections of GDP and of, you know, the debt sustainability and so on.

They are very problematic because they underestimate the amount of debt that has to be cut.

They underestimate the haircuts.

And so we find in country after country, this is not the first time it's happened in earlier crises

as well, that the reduction is simply not enough to enable those economies to grow out of that problem.

The policies being advanced by the IMFs, the world banks, why is it that they don't work?

I think, uh, one of the big problems with the way that the multilateral system deals with sovereign debt is that the system

is really heavily geared towards the interests of the creditors.

And the creditors include, of course, the rich, powerful governments and the multilateral financial institutions.

But now increasingly, and for more than half of sovereign debt of low and middle income countries, they are private creditors.

And many of them are huge.

BlackRock, a whole bunch of these private financial companies that have trillions of dollars of money that they manage

are the major holders now of African debt, for example, but also the debt of many, many other developing countries.

And so the systems that are set up are really designed to further their interests.

And that's been true, certainly of the legal architecture.

So about 90%, 95 percent of all sovereign debt contracts are drawn up in either the city of London or in New York,

and they are heavily oriented towards creditor interests.

And we have many examples of cases where creditor interests are upheld, at great cost to governments and citizens of the poor.

debtor countries.

In most of these countries, and certainly both in London and New York, there is legislation to protect the interests of debtors.

You know, they have bankruptcy laws, they have different kinds of contexts which enable those who really,

really cannot repay to somehow deal with the situation.

They have debt workout laws.

There are no debt workout laws for sovereign debt, and that's the real problem.

So we definitely need a global system of debt workout laws for sovereign debt to override this very skewed legal system

that operates in favor of the creditors vis a vis the debtors.

The multilateral system was supposed to deliver that, right?

I mean, that's what they announced.

G20 said, Oh, yes, we're going to set up this special debt service suspension initiative during the pandemic.

And then we'll have this common framework.

Subsequently, now the IMF and the World Bank, they have a global sovereign debt roundtable at

which they're supposed to get everybody involved.

But in fact, private creditors don't bother.

They don't see why they have to be involved.

There is no pressure on them.

There's no urgency for them.

And there is no way of forcing them unless the governments of those countries decide to do something or unless

legislation in those countries forces private creditors to the table just the way it does for domestic debt.

This common framework has been in existence for more than three years and has not delivered at all.

That means that they don't take this debt that seriously.

that even if there is a default, it's not going to upset the global system.

So we have to somehow generate that urgency.

If we really want to get a change, sorting out this massive problem of debt distress that so

many millions of people are being affected by.

Thank you so much, Jayati.

Charles, would you like to chip into that, um, question of as to why the system structure doesn't work?

Yeah, developing countries have always, um, negotiated as individual countries against cartels.

So in the past, when they were dependent on formal, uh, debt owed to, to governments, they always went one country against a group

of countries and institutions organized around a Paris Club.

Many of them are quite new to private capital markets, and yet the Common Framework also basically aligns them in the same way.

Individual countries negotiating with a cartel of private creditors.

They have a cartel, and that's the Institute for International Finance that mediates for the Black Rocks and all of those.

Thank you very much.

And yet these poor individual countries have to face this cartel with, uh, the institutions of, uh, the

global north, um, the multilateral institutions of global north, like the IMF, basically acting for them.

So it's, it's like, um, a David and Goliath situation all the time.

And so.

It is important that, um, developing countries also start to think and find ways, um, to, to negotiate

together, to support each other, you know, to build alternative groups, um, cartels and as debtors.

So there is a more collective.

organizing around this.

Without it, the power imbalances are too huge to deal with.

Hopefully, we have to see whether the entities like the BRICS and the G20 and the Shanghai initiatives, other

alternative institutions that are, you know, emerging from the global south, from the majority country, global majority

countries, Can also play a positive role in enabling, you know, developing countries to, to negotiate as collectives.

Uh, this is, this is very important, but the second point to emphasize is that, uh, a lot of these solutions also lie in

the hands of, uh, uh, developing country governors, what they do in, in, in their, in their countries, first and foremost.

We have to find a way to redirect and revive development, banking, uh, development, finance, ways to raise capital and

resources to channel resources into the productive sectors and in Africa in particular, how to rechannel resources into

agriculture and to small scale businesses and and so on.

So we need to take another look at how development finance ought to be resurrected in many of our countries.

That might reduce.

The need to always look external for resources.

And secondly, there has got to be an increasing realization that domestic resources and domestic currency

ought to be the main driver of domestic investment.

And that this appetite for, for foreign exchange loans is something that needs to be

tackled by developing, developing countries.

And you probably would find that most of the more matured developing countries, the more upper middle income countries

have wisened up and are increasingly less, uh, hungry.

For borrowing abroad and that they are looking more and more into how to mobilize domestic resources and mobilize resources

in domestic currencies and national currencies for reinvestment.

So in a way that is important for developing countries to take those steps to reshape the relationship between developing

countries and the global north in the way that money and finance Money and resources are mobilized for development.

Those are steps that developing countries can take themselves.

Thank you for that, Charles.

So if the policies don't work or are bound to fail, why is it that these institutions, considering their global

influence, would be pushing these sort of policies?

You know, that's such an interesting political economy question, and it's interesting also in many ways, because

when you think about it, the 1990s was actually a period of reckoning for the IMF in particular, because there was something

like more than 70 debt crises across the developing world and developing countries have become very wary of the IMF because

they saw how going to the IMF really gives you a lost decade.

I mean, Africa had it, Latin America had it.

And so they really went in that much more from there for self insurance.

So from the late 1990s and the Southeast Asian crisis and the Argentine crisis in 2000s and so on.

After all of that.

Many developing countries actually decided that they would go to the IMF only as the absolute

last resort, and possibly not even then.

They sought all kinds of other ways of actually addressing the financing gaps and the concerns that they had.

And some of them are actually Better because they, uh, enable greater self reliance and greater autonomy and ability

to do the kinds of things that Charles was mentioning.

By the time of the global financial crisis, the IMF was receiving more money from developing countries than it was giving out.

It was almost irrelevant, okay?

The World Bank, slightly better off, but not very much so.

So, the global financial crisis almost came like a big gift to them.

I mean, suddenly the G20 decided that the IMF is the institution that will have to help everybody recover

from this and they all recapitalized, all the G20 members decided to recapitalize the IMF to provide more financing

for the rest of the world in the middle of this crisis.

The IMF was literally this patient on life support and it got resurrected by the global financial crisis.

And of course it then, uh, covered itself in glory during the Eurozone crisis where it did its usual conditions, but

you know, less than it does in most developing countries.

And yet even those conditions were correctly seen as a, an incredibly damaging for the economies.

And Greece, for example, has experienced, uh, a more than a decade of, of deterioration, of living conditions and, and so on.

So.

The IMF has become an instrument of the great powers to keep the financial system in a way going in a way that would benefit

large capital that is mostly based in the north, I would say.

Unfortunately, that, you know, the problem is really that these ar really, the only institutions we have that are

global multilateral in that economic and financial sense.

We have the IMF, the World Bank and the WTO, unfortunately, as the main multilateral institutions.

Now we can say they are terrible and they are, we can say their functioning has been disastrous.

Which it has been.

We can say that their programs and the way they lend and the kinds of conditions they impose are deeply damaging,

undemocratic and designed to benefit the rich and the creditors.

We can say all of that.

But unfortunately, that's the framework we have.

So, we can say we want to just dump them and build another framework.

We know we can't build another global framework.

It's not so easy, especially in this very divided world that we have right now.

So what do we do?

I mean, I think definitely we have to think of ways of using whatever benefit we can get out of them and then minimize.

the need or relying on them.

So in terms of benefit, there is one major benefit that the world could still extract from the IMF.

And when I say world, I mean mostly the people of the developing countries, the global majority.

And that is in the special drawing rights, which is the liquidity that the IMF can create.

So, the IMF has the capacity to create special drawing rights, which are basically a unit of account.

You know, they lie in every country gets allocated these special drawing rights, and they lie in your reserves in the IMF.

If you want to use them, you can exchange them for any currency.

So, you can exchange them for dollars or euro or yen or anything, uh, but then you pay a a rate of interest for doing that,

but there's no other cost and there's no cost to anyone else.

Now, if we just allowed an expansion of special drawing rights, SDRs every year, just in accordance with how the

world economy is growing, because the whole idea is that it should be at least, you know, the same proportion, uh,

to the world economy as it was, let's say 10 years ago.

Now, if we just allowed SDRs to be issued Along with the expansion of the global economy, that would

generate about 200 to 250 billion dollars a year.

Okay.

And the great thing about SDRs is that it's only the country that uses them that pays that SDR interest rate.

No other country has any cost whatsoever.

It's completely costless for all these countries.

If you had that, you have to stop worrying and begging the rich countries for some ODA, begging them for some

debt relief, begging them for all of these things.

If you allocate it properly, Now, at the moment, SDRs are allocated according to your quota in the IMF.

That's another ridiculous thing.

That was something that was done when it was first set up in 1944, based on shares of the global economy then.

And so obviously it's completely out of date.

But in any case, why distribute SDRs according to quota because most of the countries who get them, who get

60 percent of the quotas are never going to use them.

They are the US, the G7 and so they don't need SDRs.

Instead, I was part of a commission that actually argued IMF SDR should be distributed for two things.

One, they should go for global public investment to combat climate change.

Both adaptation and mitigation, because we know that that's already creating huge problems across the world.

But also they should go to countries in need, depending on certain criteria.

So it should be any shock that is not of your own making.

It can be a terms of trade shock.

It can be a climate shock, a disaster.

It can be an interest rate shock that suddenly the US decides to raise interest rates and so you have a massive capital outflow.

which is not your fault.

But any such shock would then allow you access to some new SDRs.

And then you could use those SDRs.

In fact, just having those SDRs in your reserves could make your life easier as a debtor economy.

That's one of the relatively small ways in which we could use the existing financial architecture.

Thank you, Jayati, for that.

So having had the conversation that we've had, what changes do you think need to happen to ensure

the management of sovereign debts is more just and works for people in the most vulnerable countries?

Charles.

Developing countries need to this.

Realized that they can't take on global institutions with powerful interests behind them on their own.

They have to organize.

Secondly, they have to do a lot more work themselves.

Even in relation to the debt sustainability analysis, they have to start to develop their own templates.

For debt sustainability analysis, uh, what kinds of debt restructuring and debt arrangements, uh, will be pro

growth without sacrificing critical social development?

Um, the Colombians did this once.

They worked on their own debt sustainability framework and used that to negotiate.

Uh, with with with with the I.

M.

F.

You have to learn to negotiate with strength.

So we have to build in the progressive elements of a pro group.

Um, you know, fair haircut sharing arrangement into our own debt sustainability frameworks.

We have to do this work.

Secondly, Uh, civil society, especially in Africa, um, have to stop believing that the IMF is the instrument

for disciplining their own government is understandable that the, you know, the, the, the crisis of development

that also translated into, you know, a crisis of governance in many of our countries has led many.

Um, you know, ordinary citizens to believe that they are no more able to hold their own government to account

and think that the IMF is the means for doing so.

The IMF was not set up to hold your government to account in order to build democratic systems accountability in your countries.

They are, they are, they are part of a global financial infrastructure that serves more.

Powerful interest and basically ends up, uh, creating more dependency on, on debt and dependency

on repeated restructuring, um, you know, and so on.

So we have to learn to solve our own governance problems.

Uh, and by doing so we create, uh, uh, more space for, for in, internally for increasing.

You know, internal generated resources for our own development and for ensuring that we can, you know, we, we,

we reduce reliance on, on, on, on external debt, increase, uh, the foreign exchange earnings by ourselves for our

needed imports and utilize our own domestic currencies.

So, the reform of the international financial architecture also starts with a way in which

developing countries position themselves individually and collectively as, uh, pillars of strength.

A huge thanks to Charles Abugre, Executive Director of Ideas and academic and development economist Jayati

Ghosh for such valuable insights into the global debt crisis.

Now, in the last of our reports on how debt default and distress is affecting working people, let's head to Southern Africa.

In November 2020, Zambia was the first African country to default on its sovereign debt during the COVID 19 pandemic.

The country is now closer to ending four years in default after securing a 1.

3 billion loan from the International Monetary Fund, but its experience with the common framework

has really highlighted the scheme's flaws.

In the middle of all this economic uncertainty, Zambia has also experienced one of the worst ever droughts.

Food supplies have been hit as have power because most of Zambia's energy comes from hydro.

Our reporter Mutuna Chanda has been speaking to Jocelyn Mofu about her experiences as a poultry farmer.

I think I can say I'm a backyard chicken farmer.

I was working for Bank of Zambia and then I stopped working in 1991.

When I lost my husband, I remained alone and I used to live with my family.

My son, who is out of employment as well.

And, uh, another nephew, who was also not working.

So the three of us, plus the maid.

And life became so difficult.

Okay, I used to get help from my, some of my children.

But still, I needed something to sustain myself.

Living on this life of begging, I don't like it at all.

So I started this business in 1999.

And I started with only 200 chickens.

In fact, I grew from 200 chickens to about 900 chickens.

But then I had a disaster at some point.

All the chickens died.

The 900, I didn't even sell, not even one chicken.

So I had to restart again.

This was, um, three years ago.

These chickens that you are, that you're keeping, how many weeks are they?

I can see they're quite small.

They are 19 days.

I order them at the point of a day old, just when they are hatched.

In fact, the brooding period is about 10 days.

And, uh, during the, the period of brooding, at least the pottery should be very, very warm.

Otherwise, if they experience the cold weather and you are not very careful, they may grow, but then the

impact will show in the fourth week to fifth week.

They will just start dying.

So I have to make sure that the, the, the, the room is, is hot.

Okay.

And, and how do you do that?

Uh, I use a brazier and bowler, with the, in fact the charcoal is not very good, but I use the, uh, fire blocks.

What are those fire blocks made of?

Those fire blocks, they are made of, um, farm produce, the waste from the farm.

This is cheaper for me than, than the, the, the electrical heating.

I start selling at the five weeks.

And sometimes when the growth is slow, I start selling at six weeks.

But the input is so much comparing with those days when I started.

Because things have gone up, feed is very expensive, all the medicines I need, they are also very expensive.

When I started, the feed was less than 50 kwacha.

Now, feed is above 700 per bag.

And when I calculated the price, in fact, the input goes up to about 45, 000.

45, 000 kwacha.

Yes, for only 500 chickens.

Right, right.

That's slightly under 2, 000, 45, 000.

What sort of measures have you had to put in place in order to stay in business?

I have no choice but to increase the cost of the chicken.

Yes.

Have your customers been accepting that?

At first they complain.

But you know with food, even if you complain, at some point you just give in.

You still need it.

You still need to eat.

Yes.

I can say they have accepted, though they have no choice, but they are not buying as much as they used to buy.

When they were reasonable.

There are certain increases of, um, of feed prices the way you have, uh, chickens that have to grow until they sell.

How do you, how do you navigate that?

You know, you make a ba a budget to say, at the point of selling, I'll spend this much.

But then with these sudden changes of in prices, then they will put you sometimes in credit You start now sourcing for funds

somewhere so that after selling the chickens you retain the money to where you borrowed And this is a very big problem.

It's a challenge that I'm facing right now

And does that eat into your profits?

Of course, it affects my profit And this is you know, even after selling I don't get excited to say

at least I've made this profit, I have to, because I don't know when I go next to buy the, the price I'll, I'll find.

So as a result, I have to be very careful in my spending.

Okay.

Given the way things have been, what do you want the government to do about what's going on?

This year we had a drought, isn't it?

Yes.

And, and the maize has gone up.

If they want to help us, I would like them to at least Work hand in hand with these people who are selling feed so

that they see how they can reduce a bit or they subsidize.

Maybe that will help us.

Many thanks to Jocelyn Mofu, a chicken farmer in Lusaka, on the challenges of running a small

business in a debt distressed country like Zambia.

Next time on Economics from the South, we'll hear from Yufen Li, a special advisor on economics and development finance.

And the Geneva based South Center

in order to tackle the problem of widening inequality, the Brazilian presidency has made great progress

in formulating the global taxation against the very rich.

Very often, the very rich, they don't pay taxation at all.

So, we see the kind of difference when countries like Brazil is in the helm of G20.

Thanks for listening.

To Economics from the South from the International Development Economics Associates, a group of progressive

economists from Latin America, Asia, and Africa who center the needs and perspectives of the global South.

More details in the podcast show notes, including links to the ideas website where there's more information.

about what we've been discussing.

Please follow or subscribe to Economics From the South wherever you get your podcasts.

I'm Julians Amboko, the producer is Penny Dale, and the concept is by Charles Abugre, C.

P.

Chandrasekhar, and atieno Andomo of the International Development Economics Associates.